Saturday, 15 February 2014

I reveal Plan B

I first wrote about currency beingimportant as long ago as 3rd November 2011.

The SNP's bizarre initial offer of Independence by virtue of the grace and continued favour of a (to be) foreign country was always going to blow up in their face. It was only a matter of when. That when turned out to be last week.

Their response however has been, on face value, equally bizarre. There are only two logical conclusions from their premise that (all of) the UK political parties and, let's not forget, the Welsh Government as well, would change their mind on a currency union in the aftermath of a Yes vote. The first would be that if these others did not recant, then the referendum would need to be re-run, since we had voted for something impossible to achieve unilaterally. We might as well have voted to annex Belgium. The second, even more improbably would be that Independence would have to be called off altogether because without English and Welsh co-operation it had proved unachievable. Except that nobody on the nationalist side is, I think, suggesting either consequence, so those who had sought that Yes vote would in the aftermath of a Yes votethen need maintain that they had been "forced" to do something about acquiring a currency. Unless of course we are to revert to a system of primitive barter, a "solution" not suggested by even the Stan Blackley wing of Yes Scotland. My conclusion is however that Eck thinks that he might yet have pulled off one final masterstroke. But you'll need to read to the end for that.

Some clearly feel that "we don't know what we'd do" is a line that can't conceivably hold for seven months. So, that vacuum is already being filled by the mainstream political triumvirate of Jim Sillars, Patrick Harvie and Colin Fox and their argument for a separate sovereign currency. Good luck with selling them in Moray and Nairn as the potential decision makers in an independent Scotland. Expect this to be a seven day wonder before they are politely but firmly told by the SNP to know their place.

But, equally, the various other plan Bs that have been canvassed for the Nationalists are far from the easy or even possible options they are made out to be.

The Euro is a non-starter. Even if it was politically acceptable and even if Scotland was to be admitted seamlessly into the EU, to join the Euro any country must meet the convergence criteria for three years. These three years could not start until we were independent in the first place and the criteria could only be met during that three year period by us possessing our own currency to demonstrate that we were meeting...... the criteria. To be honest, I'm less than clear why this features in the press as an option at all. For it is not.

Repudiating the debt and using Sterling (or indeed the Euro or the US Dollar or any other fully tradeable currency) without a currency union is theoretically possible but on examining the detail equally a non-starter. Never mind what it would mean for the operation of the Scottish Financial Services Industry, with its 94,000 jobs, to be operating in a country without a central bank lender of last resort (Here's a hint, it wouldn't be operating) using Sterling for the government to function depends on the Government starting off with a lot of Sterling. Independence day is, we are told, to be on 24th March 2016. Within the next seven days, every central government worker in Scotland would be expecting to be paid. In Sterling. Where would this Sterling come from? Given that we had just dissed them on UK debt, the Bank of England would be unlikely (sic) to be willing to lend it to us. Given that, without a lender of last resort, there would be no major Scottish Banks, they wouldn't be able to lend it to us. Given the uncertainty about tax receipts coming in and the fact that our only credit history would be of a moral and possibly (in international law) legal default on our share of UK debt, I doubt very much if the international money markets would be crying out "Haud me back!" Sure, eventually, there would be tax receipts but VAT is paid up to four months in arrears, Corporation tax and Schedule D income tax up to 21 months. Even excise duty and petroleum revenue tax has some element of delay in reaching the exchequer. As anybody who has ever run a business will know, survival needs attention not just to profitability but also to cash flow. Countries, or at least countries without their own currency, are exposed to exactly the same risks. In this case would be so exposed within a week!

Then again, we could honour the debt and continue to informally use Sterling. That at least largely removes the (short term at least) cash flow issue as we'd inherit some UK reserves but still leaves us, once they'd been spent, borrowing and repaying in a foreign currency to pay our bills at potentially punitive rates. At least until some degree of economic responsibility was established by example. Anybody voting yes in anticipation of immediate tax cuts and increased public spending, "an end to austerity", might want to ponder that. More to the point, it solves none of the problems associated with the absence of a lender of last resort, Most ironically of all, since the cheapest source of Sterling would inevitably be the Bank of England, we'd be in the situation where a foreign country, by setting conditions on its willingness to lend, could effectively dictate our economic policy and (be in no doubt) our foreign and immigration policy as well. The only real way of avoiding that would be to run a current account surplus, something even the savage Coalition axe to public spending hasn't proved close to achieving either in the UK or in Scotland alone, even allocating to us all of the oil receipts.

And so we come to the only real player, a separate Scottish currency. At the end of March 2016, everybody would get paid but in newly minted Pound Scots. This is the Sillars, Harvie and Fox solution and, in their hearts, the one that most of the nationalists would prefer. After all, what kind of Country doesn't have (at least a share of) its own currency? The examples quoted in support of doing without, Panama and Montenegro, hardly inspire confidence. So why are Eck and Nicola and John so against us having our own currency? Here's why, because once you think it through nobody, or at least nobody not mainly concerned with flags and anthems is going to vote for it, at least knowingly. For the economic risks are far too great.

Here I want just to knock one idea quickly on its head. That the Scots Pound could be tied or "pegged" in value to the Pound Sterling. And to do so by referring to an unusual source for me, The Scottish Government's own Council of Economic Advisers

For attached to their First Report was an Annex in which they examine the various currency options for an independent Scotland. The link is here In common with all of the work of the Council, the bad news has to be there to protect at least some integrity of the project but it's inclined to be in the small print and at the end. Here it is Paragraph 104 (of 111).

For, in outlining what would be necessary to make "pegging" work, it says this.

"104 Firstly, Scotland would need to introduce a new currency and re-denominate all domestic wages, prices and contracts. Secondly, to maintain confidence and the credibility of the new currency, some form of mechanisms may be necessary with regard to deposits and investment in Scotland. Thirdly, as this would be a new currency, joint action between the major central banks with an interest in the stability of a new Scottish currency (i.e. the Scottish Central Bank and the Bank of England) would be likely."

(My emphases obviously)

Now, apart from the oblique reference to exchange controls not making the currency fully convertible, here we have it again. A fixed rate between the Scots Pound and the Pound Sterling would require the assistance of.....the English! And you can guarantee that, even if they were so inclined, that co-operation would come at the price of the oversight and approval of the Scottish budget. Logically, if we sought their permission and assistance to peg at parity (as Sillars proposes) that would most certainly not just be our decision. For how could they reasonably be expected to (try to) protect the value of our currency no matter how we conducted our affairs?

So we'd have this deal:.

Dear Scotland,

If you follow the economic policies we dictate then we'll assist in stabilising your currency.

Best Wishes,

George Osborne.

p.s. Even then we might not be able to help. We couldn't keep ourselves in the ERM."

By the way, before moving on to my conclusion let's pause to reflect that the major argument made to those outwith the gut instinct "It's my Flag and I'd starve for it" camp is precisely that Independence will allow us to pursue different economic policies from those wished by "Middle England". Indeed, those shouting that most loudly are.......Jim Sillars, Patrick Harvie and Colin Fox! You can have different economic policies or a fixed rate of exchange. You can't have both.

And so we're left with the only real option, the only real option there has ever been if one wishes to preserve, "real" independence and yet to also preserve, after independence, never mind free trade, simply an open border. That is a Scottish currency worth whatever the world market thinks it is worth. At whatever rate of exchange the world market, including, crucially, England, was prepared to accept in exchange for its food, manufactures and holiday hospitality. So, let's go back to my example of payday March 2016. Everybody would get paid exactly the same number of Scots Pounds as they had previously been paid Pounds Sterling. Whether they had actually been paid the same however would only be known when they tried to spend that money in the shops. And the same considerations would not just apply to wages but to savings, pensions and benefits. Not a single one of us five million would not be impacted in some way. Maybe we do have enough Oil and Whisky and fish for it to pay off but that is some gamble for the sake of a flag. Suffice to say I'd be in no doubt myself as to on which side of the border my modest savings would be on 23rd March 2016. No wonder Eck wants to try to keep that quiet until after the vote and see it implemented before the next Scottish Elections. That is nonetheless his plan B.

And in some ways it's brilliant. For if it goes well he'll have got what he wants despite the fact no-one would ever have voted to take the chance if asked directly. And if it goes wrong? He'll have one final reason to blame the English.

3 comments:

This is interesting, and is pretty much along the lines of what I think will happen. And, as such, in the event of a ‘Yes’ vote, I have mentally written off the public sector pension that’s due to come to me when (or if) I reach 65.

Why?

Because the logical thing for the first finance minister of the independent state to do would be to print money to pay the bills, and operate an unwritten policy of running double digit inflation for a few years in order to devalue internal obligations (ie, public sector pensions, government contracts, welfare payments, public sector pay etc), and so stabilise the government finances in the long term. This is exactly what the German inflation of the early 1920s was designed to do, and, indeed, succeeded in doing, by wiping out the value of war bonds and other internal debts, thus giving the government a clean slate.

Thus, in the even of a ‘Yes’ vote, I am pretty sure my pension will be worth peanuts by the time I get to it. But at least I’ve got plenty of time to build up another one before I check out – which won’t be the case for folk in their 50s and 60s.

Yours, John

PS Your correspondent Ewan MacKenzie doesn’t seem to quite have his hat on the back on what’s going on here. He should make no mistake that the untangling of such an advanced, integrated, and wealthy country has never been attempted before in human history. And, yes, it will be difficult. VERY difficult. Too difficult, I fear, for our current crop of politicians and civil servants to pull off without a great deal of pain.

The Euro has been dismissed as a currency option, only those who are unaware or not bright enough to realise this will still mention it, e.g. the desperate mainstream media.

Scotland will be able to borrow if it wants to and pay back what it borrows, the elephant in the room is whether it will pay uk debt it didn't actually accrue and has no legal obligation to pay. The money markets don't give a toss if Scotland tells the uk that an asset being removed means a potential liability being removed, they only care about the financial state of Scotland upon Independence, and that will be healthier than that of the defunct uk which will no longer hold that title with Scotland gone.

I note that you have ".......some form of mechanisms may be necessary".......and ".......would be likely" -not impressive is it? You are using these terms to reinforce the absolute pretence that any usage of the pound whatsoever will be at the discretion of some westminster person?

To write all those words and miss out the balance (no pun) of any sort of downside for the former uk whatsoever is the stuff of dreams and is what, along with threats upon us about our pound as a shared asset and all the other nonsense and negativity will lose you the no vote.

I enjoyed the irony of Ed Baws today saying how 'opposed' he is to the tories, hilarious when you think of how he spoke to Scotland last week, bullying us in support of his bedfellow tories.

The lovebomb and fearbomb are just not going to sustain the negativity of no, your blind support for the tories has put people off labour and showed clearly they lack credibility as an alternative to the tories.